Loonie to head higher once calm returns to markets: Portfolio manager

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Canadian dollar bears, gratified by the currency’s slide after a dovish Bank of Canada statement, face hurdles to further weakness in the form of rising domestic oil prices and a robust technical barrier, foreign-exchange strategists say.

The loonie ended Wednesday close to the weakest since June 2017 as traders marked down the odds of BOC rate hikes throughout 2019. The OIS-implied probability of a January rate increase slid below 30 per cent from 70 per cent two weeks ago. Meanwhile, the price of Canadian oil, whose sharp drop since early October informed the BOC’s stance, has been edging higher.

“I expect improving conditions for oil to point USD/CAD lower from here,” said Greg Anderson, global head of FX strategy at BMO.

Western Canada Select crude, the benchmark for Canadian oil sands production, approached US$13 a barrel in November from a year-to-date high of nearly $58 in May. It has rebounded to around US$30 following production cuts in Alberta.

“US$40 a barrel on WCS and they’re no longer worried,” Anderson said.

Technical indicators may also help steady the loonie. Stable risk-reversals signal that investors are betting the range of about $1.28 to $1.34 for the second half of 2018 will hold. Also, $1.3384 marks the 76.4 per cent Fibonacci retracement level of USD/CAD’s 2017 decline, sparked by the BOC’s signal that rate increases were coming.

Risks on the horizon for the loonie include a Thursday speech by BOC Governor Stephen Poloz which could sway the currency, particularly if he appears to indicate which direction business sentiment is heading, RBC’s Mark Chandler said.